Canada Office Figures Q3 2024

Executive Summary

• Overall Canadian office market activity was effectively neutral this quarter. Despite this lull, the market is on track to report its first yearly positive net absorption total since 2019.
• City-by-city, experience differed with six of 10 markets posting positive absorption. This was led by Toronto through a combination of pre-leasing and healthy market activity; however, was offset by softness in Vancouver and Montreal.
• The performance gap between Trophy and Class B/C assets has continued to widen amidst flight-to-quality moves. Market bifurcation is expected to persist, with Trophy asset vacancy at its lowest level in nearly four years.
• Sublet space fell for a fifth consecutive quarter. On a year-over-year basis, seven markets have seen sublet vacancy rate decrease. Select markets, however, noted a marked increase is this quarter namely Vancouver and Calgary.
• Building conversions are still prevalent with 674,000 sq. ft. coming out of office inventory this quarter. The program that kick-started this trend, Calgary’s Downtown Development Incentive Program, was recently revived with $52.5 million available in new funding.

A rare quarter of neutral national office activity

Overall Canadian office market activity was effectively neutral this quarter with just 53,000 sq. ft. of negative net absorption. It is a rarity for the national sum to nearly equal 0. Despite this lull, the market is on track to report its first yearly positive net absorption total since 2019.

Six of 10 markets posted positive absorption in the third quarter. This continues the trend observed since Q3 2023 where five or more markets have posted gains each quarter.

Toronto led the pack with over 650,000 sq. ft. of positive net absorption, in nearly equal measure from downtown and suburbs. A third of this activity stemmed from pre-leased new supply, the remaining coming from healthy leasing momentum which is expected to continue into year-end.

Three markets experienced over 100,000 sq. ft. of negative net absorption, effectively cancelling out Toronto’s gains, namely: Montreal, Vancouver and Ottawa. While there are still pockets of activity in these cities, they have on an overall basis experienced slowing. Vancouver noted an increase in sublet listings, meanwhile Montreal saw more direct space come online amidst lighter leasing activity.

Trophy assets clock in tightest vacancy rate in nearly four years

Market bifurcation is expected to persist, especially as tenants undergo flight-to-quality moves, leaving behind increasingly outdated product with little tenant interest to backfill.

Exhibiting this trend, Trophy assets, the top-tier among Class A, saw market tightening of 20 bps this quarter and was led by activity in Calgary and Toronto. Vacancy levels within this in-demand product type are the lowest they have been in nearly four years.

The delta between vacancy in Trophy and B/C buildings meanwhile has continued to widen, with vacancy in Class B/C product nearly two and a half times higher than Trophy.

Landlords looking to combat this divide between quality and commodity space are undergoing significant capital improvements and retrofits to help remain competitive and support the long-term appeal of their assets. As prime space availability tightens, demand will likely overflow to the next quality tier of buildings, especially those that are well-located and with in-demand amenities.

Diverging trend once again between rebounding suburbs and stalling downtown

The national office vacancy rate increased slightly by 10 bps to 18.6% in Q3. Despite the minor increase, the overall average has remained in a narrow 30 bps range for the last six quarters.

After both regions largely remained flat over the course of 2024, the diverging dynamics between downtown and suburban vacancy has recommenced once again. The suburbs experienced a 10 bps tightening to downtown’s 30 bps increase this quarter.

This translated to seven markets noting declining suburban vacancy, and was led by London (-130 bps), Toronto and Calgary (-50 bps, each). Downtown, only four markets experienced tightening, however not to the same degree as the increases. In fact, three markets saw their downtown vacancy rise by over 100 bps this quarter, including Montreal (+120 bps), London (+110 bps) and Vancouver (+100 bps).

Looking ahead, anticipated deliveries in the final quarter of year are only 23.6% pre-leased and, should this remain unchanged, would raise the current vacancy rate by 20 bps if delivered today. The bulk of this impact will be felt in downtown Toronto.

Claiming and returning sublet space

Sublet space has declined for a fifth consecutive quarter now having shaved 2.2 million sq. ft. off from the peak in Q2 2023. Currently 14.8 million sq. ft., this is the lowest level of sublease space nationally in nearly two years and is equal to 3.0% of existing inventory.

On a year-over-year basis, seven markets have seen their sublet vacancy rate decrease, most notably in Ottawa, Toronto and Halifax which have, respectively, declined 90 bps, 80 bps and 70 bps.

In absolute terms, Vancouver noted the largest increase in sublet space on a quarterly basis due to a handful of in large block vacancies which came to market in new builds.

Calgary meanwhile which has had an impressive run at reducing sublet vacancy also noted an increase this quarter, tied to Suncor Energy listing 187,000 sq. ft. of space at Suncor Energy Centre.

Toronto experienced the largest quarterly decrease through a combination of leasing activity and listings going off-market.

Dwindling construction reaches 20-year low

Having fallen for the last nine consecutive quarters, office construction has now lowered to 4.2 million sq. ft., a level not seen since 2004. Well-below the 10-year average of 14.3 million sq. ft., activity is expected to remain muted until tenant demand for best-in-class space works through existing trophy/Class A space.

The pipeline is currently 36.7% pre-leased and dropped once again this quarter due to the delivery of new supply. Pre-lease commitments otherwise held stable.

Montreal, Ottawa, Calgary, Halifax and Waterloo Region are currently building less than 150,000 sq. ft. apiece. With at most two projects underway in each market, these modest levels of construction are for the most part either 0% or 100% pre-leased.

Toronto is the only market with over 1.0 million sq. ft. under construction and accounts for nearly 75% of activity nation-wide. Projects anticipated for delivery in Q4 will see Vancouver and Toronto’s total construction activity drop by nearly 30% by year-end.

New supply on track for seven-year annual high

As has been the trend over the last few years, increasingly few new office buildings are moving forward. In fact, no projects commenced this quarter. This is the second time this has occurred in the last two years.

Further, projects that are moving forward in today’s environment are not to the same scale as seen previously. Just five years ago, the quarterly average of starts was equal to 1.6 million sq. ft., in 2024 it is significantly lighter at 30,000 sq. ft.

1.0 million sq. ft. of new supply was delivered this quarter at 32.5% pre-leased. Major deliveries included EQ Bank Tower in Toronto, as well two buildings at the Discovery Campus in Burnaby, Vancouver.

2024 is on track to be a record year for new supply. Over 5.7 million sq. ft. has been delivered year-to-date nationally, surpassing full-year totals from the last two years, and if all projects deliver as anticipated, 2024 will total to a new seven-year high.

Office conversions activity continued into late summer

Office conversions continue to move forward with 674,000 sq. ft. coming out of competitive inventory this quarter. In total, five projects commenced across three markets.

The removal of this space has had a minimal impact on reducing national office vacancy, however. Year-to-date conversions in 2024 have only aided in reducing vacancy by 20 bps.

A cumulative 6.9 million sq. ft. of former office product has begun conversion or been repurposed into other uses since 2021,  equal to 1.4% of inventory. Over the same time period, the latest development cycle has added 4.1% to national inventory through new supply.

Office-to-residential conversion projects continue to comprise the majority of activity (61.9%).

After being put on hold for the last year, Calgary’s Downtown Development Incentive Program has been revived. $52.5 million in new funding is available within this latest round.